Is It Time for Consumer Discretionary Stocks?

Kelly Green
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October 2, 2024
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Comments

Monday marked the last day of the third quarter. Now we’ve got about 10 days before earnings reports start flooding the markets.

Earnings season usually lasts around six weeks, so this wave of data will take us almost to Thanksgiving. The holiday season will be in full swing by then, and before we know it the fourth quarter will be a wrap as well.

And smack-dab in the middle of this earnings season is the presidential election. Plus, the Fed will get two more opportunities to cut rates in the fourth quarter.

We’re in a calm before the storm, or should I say a pause before the action. Whenever data floods into the market we get a reaction from investors.

We can pretend that the stock market is rational and moves based on fundamentals reported by companies. But in the end, a company’s share price is very much tied to investor sentiment.

This is evident when we look at metrics that compare a stock’s price to specific financial numbers reported by the company, such as the price to earnings (P/E) ratio. This measures how many multiples of yearly earnings investors are willing to pay for shares—which is essentially sentiment about the future of the company.

It’s going to be important to watch how investors interpret the data flooding the market. During the fourth quarter, it will be equally important to keep an eye on another group.

Can Consumers Continue to Spend?

August, September, and October are when 48% of shoppers begin their holiday buying. This means that analysts can already start to gauge holiday shopper behavior well before December, and then release their sales expectations for the season.

Mastercard SpendingPulse predicts holiday season spending will be 3.2% above last year. This measures the period November 1-December 1 and excludes automotive sales. Deloitte predicts a similar 2.3–3.3% rise in holiday spending.

Now that the Fed has lowered interest rates, it will be interesting to see if consumers spend more. Typically, when borrowing costs fall, consumer spending rises. However, there is a lag between a drop in rates and when consumers begin to see a lower interest rate burden.

Right now, we’re simply seeing analyst holiday sales expectations. Once we get past Black Friday and Cyber Monday, analysts use these actual sales numbers to turn speculation into hard numbers which influence investor sentiment.

This will be an important pivot point in time if you have consumer goods or retailers on your watchlist.

This Lagging Sector Could See a Holiday Boost

The S&P 500 continues to make new highs and is up 20.3% so far this year. We know that this index is a broad measure of the market, and that individual stocks and sectors move independently.

One of the laggards is the consumer discretionary sector, up just 12.3% year to date. It’s the fourth worst performing sector of the 11 in the S&P 500. And the sector is currently being propped up by companies like wholesale online marketplace Alibaba Group (BABA) and Amazon (AMZN), up 41.5% and 23.7%, respectively.

I’ve been griping about how I’d like to have more consumer discretionary stocks in our portfolio for at least a year now. And instead of getting my wish, it seems that more and more of these companies are being forced to cut their dividends.

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Plus, over the past few years, these dividend cuts have been accompanied by strategic transformation plans. That can easily mean we won’t see dividend recovery for 12–18 months. And that’s being optimistic.

At the end of the day, if you have retailers or consumer brands that are on your watchlist, you should be monitoring them right now. If interest rates continue to head down, we should see greater consumer willingness to part with their hard-earned dollars. That makes an argument for holding these stocks in 2025.

To know the right time to buy, I would make sure to check out the third-quarter earnings numbers. During these earnings calls, you’ll also hear management’s outlook for the holiday season. Then I would wait for those Black Friday and Cyber Monday numbers to confirm the spending trend.

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